Germans to seize trade from City

Stock exchange deal ‘gives Frankfurt upper hand’

Deutsche Börse’s €25 billion merger with the London Stock Exchange will trigger a huge grab of business by Frankfurt from the City, a study claims.

Research, which was commissioned by the German exchange, says that the merger will give Deutsche Börse the opportunity to relocate billions of pounds of derivatives trading from the UK to Germany.

The findings raise fresh questions about whether the deal, which will have to be signed off by the Bank of England, is in the City’s best interests.

“Deutsche Börse has a good chance of winning significant long-term market share in the areas of interest rate and currency trading and relocating trading from London to Frankfurt if the market participants in London are given unrestricted access to superior trading platforms in Frankfurt,” Dirk Schiereck, chairman of corporate finance at Technische Universität Darmstadt, wrote in the report.

Professor Schiereck makes several references to Frankfurt’s luring of bund trading from London in the 1990s, which is still seen in the City as one of the biggest losses of business to hit the UK financial services industry.

The report cites this move as a potential guide for Germany when the merger completes.

“There is a history of derivatives trading shifting from London to Frankfurt. Although no significant trading in listed derivatives takes place in London, there is an extremely large market for [over-the-counter] interest rate risk and currency risk. A merger between Deutsche Börse and the London Stock Exchange could even offer the prospect of structural change here,” Professor Schiereck wrote.

The European Central Bank said last week that it believed any Brexit deal would have to leave scope for the Frankfurt-based EU central bank to supervise some trading in London.

“It will be important to find solutions that at least preserve, or ideally enhance, the current level of supervision and oversight,” Mario Draghi, ECB president, wrote in a letter to an MEP.

A fight is looming over the location of clearing with senior eurozone politicians talking about forcing euro- denominated clearing out of London.

Xavier Rolet, chief executive of the London Stock Exchange, told MPs last week that more than 200,000 jobs could go if euro clearing was relocated from the UK.

Professor Schiereck said in the report that combining the Frankfurt exchange with its London rival would allow the European Central Bank to exercise control over UK financial markets even after Brexit.

“The supervisory and regulatory bodies will retain their ability to intervene in London’s financial centre, with its outstanding position in currency and interest rate derivatives trading, especially if clearing and settlement processes were to be integrated in Frankfurt,” Prof Schiereck wrote.

A spokesman for Deutsche Börse said that the report reflected the author’s opinions, but confirmed that it had commissioned the work.